Americans have set an ambitious target for their retirement savings, with a recent study revealing that many believe they should have approximately $1.46 million stashed away to retire comfortably. However, the reality is starkly different, as most Americans, on average, have less than $89,000 saved for their golden years, according to a Northwestern Mutual study released this week.
The impact of inflation on Americans' wallets has taken a significant toll on their retirement savings. "People's 'magic number' to retire comfortably has exploded to an all-time high, and the gap between their goals and progress has never been wider," says Aditi Javeri Gokhale, head of institutional investments and president of retail investments at Northwestern Mutual. "Inflation is expanding our expectations for retirement savings and is putting the pressure on the ability to plan and stay disciplined."
The staggering $1.46 million target is a 15% increase from the $1.27 million reported last year and a 53% jump since 2020, far outpacing the current inflation rate. The study also revealed a significant disparity between age groups, with those aged 50-59 believing they need around $1.74 million saved but having only $115.7k, while those aged 40-49 think they need approximately $1.3 million but have just $91.5k set aside.
Despite these alarming figures, a 2023 survey by Bankrate found that only 40% of "Gen X" workers know exactly how much they will need to retire. The average retirement age, according to a 2016 poll from the US Census Bureau, was 63 for women and 65 for men.
The Northwestern Mutual study also highlighted the generational differences in retirement planning and expectations. Gen Z, the youngest group surveyed, believes they will need $1.63 million for retirement but have only saved an average of $22,800 - a staggering $1.61 million gap. Millennials think they'll need $1.65 million but have only saved $62,600 on average, while Gen X forecasts a need for $1.56 million but has saved an average of $108,600. Even Boomers, the closest to retirement, predict they'll need $990,000 but have only saved an average of $120,300.
Interestingly, Gen Z has taken a proactive approach to retirement planning, starting to save at an average age of 22, nearly a decade earlier than the overall average age across generations of 31. They also expect to retire at age 60, a dozen years earlier than Boomers, four years earlier than Millennials, and seven years sooner than Gen X.
"Young people today recognize the value of retirement planning and building wealth early on in life and are getting a significant head start over their parents and grandparents," said Gokhale.
In addition to saving earlier, Gen Z and Millennials also expect to live longer, with three in 10 believing they will celebrate their centennial birthday, compared to only 22% of Gen Xers and 21% of Boomers.
Despite the growing awareness of the need for retirement planning, the study found that only 30% of Americans have a plan to minimize the taxes they pay on their retirement savings. "Most people don't realize that their retirement income will likely be taxed at 20% to 30% when they withdraw and spend it. When they recognize the impact, it's often too late for them to adjust," Gokhale warned.
As Americans grapple with the challenges of saving for retirement in an inflationary environment, the stark contrast between their expectations and reality serves as a wake-up call. The study underscores the importance of early planning, tax optimization strategies, and a realistic assessment of retirement needs to ensure a comfortable future.
New York and New Jersey, known for their high cost of living, were recently ranked among the worst states to retire in, according to a WalletHub ranking that considered affordability, quality of life, and healthcare. With housing costs 80% higher than the national average and healthcare services 7% above the norm in New York, retirees face significant financial hurdles in these states.
As the retirement landscape continues to evolve, Americans must adapt their strategies to account for longer lifespans, rising costs, and the potential limitations of traditional retirement income sources like Social Security. By starting early, diversifying investments, and seeking professional guidance, individuals can work towards closing the gap between their retirement dreams and the financial realities they face.
